Bank’s bleak view of what’s ahead

National Australia Bank has released its half-year results almost a fortnight ahead of schedule, with profits hit hard as a result of the COVID-19 pandemic and dividends slashed by two-thirds.

It has also offered two possible scenarios on the country’s recovery – one described by The Age senior business analyst as severe and the other as horrific.

With other major banks yet to reveal their positions, market analysts say any holdout over slashing dividends risks stymying the stock market’s recovery.

NAB said its cash profit for the six months to March was $1.44 billion, a drop of 52 per cent compared with the same half last year. The result did, however, include a $1.61 billion credit impairment charge, which more than doubled as a result of the pandemic.

The bank announced it would pay an interim dividend of 30 cents a share, down from 83 cents, and was planning to raise $3.5 billion in equity through an institutional placement and share purchase plan.

NAB chief executive Ross McEwan said the measures would bolster the bank’s footing so it could weather the economic fallout of the coronavirus crisis.

“We entered this challenging period in a robust position, with capital, funding and liquidity significantly strengthened over recent years,” Mr McEwan said.

“However, given the uncertain outlook, we have taken proactive steps to further strengthen our balance sheet.”

The decision was a balancing act, he said.

“(About) 48 per cent of shareholders do rely on a dividend … at the time of a placement you don’t want the share price dragged down,” he said.

The Australian Prudential Regulation Authority (APRA) had warned major banks to “seriously consider” deferring dividend payments until the economic forecast became clearer.

APRA chairman Wayne Byres wrote to boards earlier this month, calling for restraint in dividends, buybacks and cash bonuses for executives.

He wrote that if they did pay a dividend, it must first be cleared by the regulator and must be at a level that was “materially reduced”.

“During this period, APRA expects that ADIs [authorised deposit-taking institutions] and insurers will seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer.

“However, where a board is confident they are able to approve a dividend before this, on the basis of robust stress-testing results that have been discussed with APRA, this should nevertheless be at a materially reduced level.”

However, considering about one million retirees rely on banking shares as a leading source of fixed income, the APRA warning drew a mixed response.

Reserve Bank governor Philip Lowe said that banks should still be able to deliver dividends to shareholders, because the major banks were “well capitalised” compared to other businesses.

Saxo Capital Markets market strategist Eleanor Creagh told The New Daily that uncertainty over future dividend cuts – whether similar to NAB’s or to zero – weighed down investor sentiment.

“The big four banks are the heavy weight on our index and on our markets,” Ms Creagh said.

“And while there’s so much uncertainty with respect to dividend payments, the key driving engine behind pushing the index higher up from [its March collapse] is stalled.”

Ms Creagh added that the Australian share market had been high yielding for three decades as “banks bent over backwards to ensure major payouts for their shareholders”.

“It’s a warning shot for investors, who may have been complacent in terms of seeking out this yield, because those payout ratios at the end of the day may not be as sustainable as people thought they were.

“And that’s not just the banks – it’s potentially across the broader market.

“If you were to take the bigger picture into account, while it may hurt the individual, you would rather the collective action of having a well-capitalised balance sheet and a buffer to withstand this period of economic uncertainty.”

ANZ Bank and Westpac are due to deliver half-year results over the next week, with speculation they will follow suit on dividends.

The Age and Sydney Morning Herald senior business columnist Stephen Bartholomeusz said that so far, the actions the banks had taken to support their customers had helped to restore reputations and brands ravaged by the financial services royal commission.

He added: “They are yet to properly confront, however, the difficult and inevitably controversial moment when they begin performing triage on their loan portfolios, deciding which businesses and individuals emerge intact and retain their support when the crisis clears, and which don’t.”

NAB has offered two views on the potential economic impact of the lockdown – a ‘V-shaped’ recovery, where the recession is relatively short-lived and the economy rebounds quite quickly and strongly, and a worst-case, or ‘U-shaped’ recovery, where it does neither.

The Age reports that the base case is for a three per cent shrinkage in the economy this year followed 3.4 per cent growth in 2021. Unemployment would peak at 11.6 per cent before falling back to 7.3 per cent next year. House prices would fall 10 per cent this year but rise 2.6 per cent in 2021.

The “severe downside” scenario would still see GDP fall three per cent this year but it would shrink again, by 2.5 per cent, next year and the economy emerge from the recession in 2022 with weak two per cent growth.

Unemployment would be lower this year, at 7.4 per cent, than in the base case but would be 10 per cent in 2021 and 10.4 per cent in 2022. House prices would fall 20.9 per cent this year and another 11.8 per cent in 2021 before 2.5 per cent growth in 2022.

Do you rely on dividends for retirement income? Are you alarmed by NAB’s economic scenarios?

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